Arts Council England's head office in London. Photograph: Dan Chung for the Guardian

Arts Council England is to take over key responsibilities from the Museums, Libraries and Archives Council but will only get 75% of its budget, it was announced today.

The MLA, which handles development work for museums and the public library service, is one of the public bodies earmarked for closure by the government, in what has been dubbed a "bonfire of the quangos". ACE has revealed that it will take over some of the MLA's key functions, but has warned it will have to do a "very focused" job, given the limited resources available.

The Department for Culture, Media and Sport has allocated ACE just £46.5m to deliver the services the MLA provides, compared with the £62m budget awarded to the MLA in 2010/11. Funding for the regional museums development programme, Renaissance in the Regions, has been protected, and will be cut by only 15% to £44.7m. But this will leave ACE with just £1.8m with which to carry out other regional museum work and the library improvement programmes. The DCMS said that MLA funding other than for Renaissance in the Regions had not been protected, "in line with the Department's decision to focus our investment on essential frontline services and cut back on administration".

Chair of ACE Liz Forgan said: "We are pleased by the confidence ministers have demonstrated in us by giving us this crucial work to take forward. This is a unique opportunity to join together the historic and the contemporary; to do away with the artificial divide caused by different funding streams and create a more coherent cultural offer. We want everyone in this country to have the opportunity to discover art, culture, history and science through a rich and varied network of local museums, arts organisations and libraries."

But library campaigners question whether ACE – itself recently told to cut running costs by 50% – is the right home for the library development role. It is an issue made urgent by the crisis facing the public library service, with councils across the country announcing major cutbacks as they seek to balance budgets hit by government cuts to local authority funding. More than 300 individual libraries have so far been advised of possible closure and the total could reach 800-1,000 when all councils have announced their plans.

Veteran campaigner Desmond Clarke, a former head of Thomson Publishing, described himself as "almost in despair" at this latest blow to libraries. "We're seeing the total decimation of the public library service," he said. "The real issue [as far as ACE is concerned] is to get in place the right people to provide vision and leadership for the library service. We haven't seen any real leadership to convince councils of the real purpose and value of public libraries. My worry is that the library function is going to be very small within the Arts Council world and it'll get lost within it."

Novelist Tracy Chevalier was also alarmed by the new dispensation: "This is depressing news. The place of libraries in society is already a big question the government and concerned parties have been trying to answer for years," she said. "But now with funds and leadership cut, libraries really are in danger of withering on the vine."

Detailed discussions are now set to take place to manage the transfer of the MLA's responsibilities to ACE by the end of 2011. MLA chair Sir Andrew Motion said the organisation would work very closely with the Arts Council "to help ensure a smooth transition of these important functions".

Future strategic responsibility for archives, which is not transferring to ACE, is yet to be announced.